Gold Is A Win - Win Proposition

The following is an excerpt from commentary that originally appeared
at Treasure Chests for
the benefit of subscribers on Tuesday, October 23rd, 2007.

Needles to say, Friday was not a good day for stock market bulls. Media types
are attributing the fall in stocks to the market finally waking up to the fact
the credit crunch is worse
than previously thought, and in a sense they are correct. In being more
specific about the context of why stocks are actually falling however, from
a technical / market internals perspective, with the supportive influence of
stock indices puts to support prices having expired Friday, prices fell to
better reflect dire circumstances in the economy is a better explanation of
what is actually happening. But you will not hear media talking about the options
related scam Wall Street is perpetuating on the investing public. This would
be bad for business.

As discussed both Sunday and last week however, while the above is true, index
put / call ratios are still too high in the November series to expect
stocks to be 'out for the count' just yet, meaning another short squeeze
of some strength should be expected as the next options expiry approaches
in November. Moving past this point things don't look so rosy for stocks
from an internals / sentiment perspective, but for November, we are anticipating
a rally into the third Friday in November (16th), especially considering
administered rates will be coming down further in the States at month's end
with stocks in the tank. (Also short
sellers are still alive as well.) And of course monetary debasement rates
will also accelerate in support of our bubble economies, which should work
to support prices, so short sellers are advised to be careful as trade into
November matures. Below we discuss a likely bounce point for the S&P
500 (SPX) in this regard, along with why accelerating global inflation rates
(the rates at which fiat currency is introduced into the financial system)
will be good for gold in all currencies.

More than this, it should be recognized gold is a discounting mechanism for
predicting accelerating monetary debasement policy, and that the fact its been
rising strongly means we should have been expecting more trouble that needed
fixing. In terms of what is happening right now, the proverbial 'second shoe'
has dropped in the credit markets, which gold has been forecasting then, and
is the 'raison d'tere' media types are attributing the stock market's decline.
Of course we know stocks are declining because of changing market internals
/ sentiment related reasons, as per above, where it appears the bears may finally
be approaching exhaustion in terms of their willingn ess to place bearish bets
against the market. And whether it be due to a natural exhaustion, or the fact
semi-informed speculators think the man behind the curtain (Wizard Of Oz) will
magically support stocks into the Presidential Election next year doesn't really
matter. The only thing that matters is US index related put / call ratios are
set to fall post options expiry next month, which will put more pressure on
authorities to print even more money as process takes hold. In terms of attempting
to paint you a picture in this regard, why don't we take a tour through a few
pictures that bring to life story line.

The first of these pictures is the ABX
Indices series of credit prices, which are reflective of broad liquidity
conditions. Here, when prices are high general liquidity conditions are fluid,
meaning central authorities need do nothing past normal (less intense) currency
debasement policy to keep economic wheels greased. Why we are showing you
the entire series below and not just pricing of lower grade credit is because
it appears even higher income earners are now becoming increasingly strained
by their debt loads as well, where AAA rated securities are threatening to
break down below lows witnessed in summer. (See Figure 1)

Of course this has already occurred to all other subordinated varieties of
credit out there these days, where delinquencies are going through the roof
as middle class America quickly disappears. We know this because even AA rated
securities have already taken out summer lows. (See Figure 2)

In moving further down the food chain, given the degree of deterioration in
pricing that is occurring at the lower end of the scale, it appears gold's
prospects in discounting Armageddon are quite bright as this stuff is falling
off a cliff. Remember now, this is still A rated debt, better than the likes
of Ford or GM credit. Old Henry would be rolling over in his grave if he knew
what was happening to his company. (See Figure 3)

That's because Ford credit is now rated junk, in the ranks of subprime debt.
In terms of pricing, if the above were to progressively mirror the pattern
here, one would need to seriously consider the possibility deflation could
grip macro-conditions soon, becoming a certainty once official hyperinflationary
counter-measures are exhausted. (See Figure 4)

And make no mistake about it, just because a bunch of bells and whistles aren't
going off announcing hyperinflation is dead ahead doesn't mean it isn't happening.
A little bit here and
a lot there,
and pretty soon all this largesse begins to add up to something. In this regard,
just a quick glance at a chart of Money At Zero Maturity (MZM) should have
one thinking money supply growth rates are about to go off the scale, and you
would be right for thinking this because it's true. (See Figure 5)

It's either that, with 'that' being hyperinflation, or our precious equity
bubbles will burst. This potential reality becomes apparent in viewing the
next series of pictures, which are updates of our analog based comparisons
of the 30's Dow echo-bubble to current patterning in the modern Dow and SPX.
And for the finale today, there is even a comparative overlay of the SPX against
the post bubble Nikki throughout the 90's that possess a potentially ominous
message. But to start, here is an exact pattern match of the NASDAQ against
the 30's Dow that is suggestive one should be very careful with respect to
long equity positions at the moment. (See Figure 7)

In cutting the scale in half, which will bring us closer to the action, along
with switching our comparison to the SPX in an attempt to match pattern recognition
as closely as possible, below we have yet another scarily compelling comparison
suggestive it's hyperinflation or die baby. (See Figure 8)

Based on these comparisons what's more scary in my eyes is even if equity
indices only correct here, which appears likely (more on this below), the subsequent
rally should be quite meager (under 10% from correction lows), but possibly
lasting until March options expiry next year, just like in the 2000 sequence.
The stars certainly appear aligned in this regard at present, with tech leading
and monetary debasement rates set to take off, which again, is a repeat of
what we saw in 2000. (See Figure 9)

Of course the real bonus for the still meager ranks of the observant in all
of this is the fact our precious metals investments should outperform, as indicated
here in viewing not only the infamous Dow
/ Gold Ratio, but also the Dow
/ XAU Ratio (representing precious metals shares), which is also set to
break down. Of course if the Dow were to break down itself here, these ratios
would represent significantly muted bullish outcomes for the metals than would
be anticipated otherwise. Such an outcome would not be consistent with what
one should expect if monetary debasement rates take off from here however,
so we will reserve such thoughts in the less likely category, along with the
other more sobering observations taken from the Chart Room below.

In this regard it should be noted the Dow has reached an important (Super-Cycle)
linear time line turn date as shown here on the weekly
plot. This in itself does not mean much today considering the brokers /
bankers / government have successfully rigged the market for so long cyclical
considerations have been distorted for some time. However, on a Super-Cycle
basis, it's now possible such forces can become realigned, where in this case
the bearish speculator becomes exhausted in spite of dire circumstances, and
prices fall with the bad news. Here, as mentioned last week, a possible seasonal
inversion could be developing because speculators elect not to short an expected
Santa Claus rally. I bring this up again because options
distributions are still poised to produce such a result, falling off considerably
across the board (OEX, SPX, SPT, DIA, DJX, NDX, NMX, QQQQ) in December. What's
more in terms of the above, one should notice the Money Force Index (MFI) is
set to break down structurally on the weekly, meaning the increasing money
flow necessary to keep prices rising is absent (think lack of foreign buying
combined with inertia), which of course can only lead to one result, that being
lower prices.

What's more with respect to the SPX, one should make note that a monthly close
below 1480ish (the daily 200-day moving average) will trigger an MFI sell signal
on the monthly plot, which could be equated to the 'kiss of death' as this
pertains to hopes for higher prices later on. Therein, this does not necessarily
mean counter trend rallies will not occur, but a monthly sell signal of this
magnitude after the longest uninterrupted rally in history is serious stuff.
Combine this with the potential bubble bursting party in Asia, along with the
parallels from the 30's (See above), and these signals must be taken seriously.
How seriously? In relation to the post echo-bubble top in the 30's, it should
be remembered the Dow sold off 50-percent over the next six-months - that's
how serious. Here is a comparative picture of the SPX set against the post
bubble Nikki that does a good job of showing that a significant divergence
in human behavior exists between the two cultures, but that if the American
people were to find some humility (voluntarily or not), the divergence shown
below could be abruptly closed. (See Figure 10)

To finish on the stock market for today, along with providing you with the
bounce target we promised to touch on above, we will employ yet another ratio
for this task, which interestingly brings us into the same price range Dave
arrived at in his analysis presented yesterday,
that being the 1450 area. In this regard then, you should know the CBOE
Volatility Index (VIX) simply has too many bullish
bets (just type in the symbol VIX and click Submit) on it to remain at
lofty levels in November, so any spike higher in coming days should be retraced
back below 20 as options expiry approaches on the third Friday of the month.
This means that any spike higher than 30 corresponding to a move in the SPX
below 1450 should be faded with extreme prejudice, with a spike low of 1420
set against a reading of 35 on the VIX a worst case outcome in reaching the
140 target denoted on the monthly SPX
/ VIX Ratio plot found in the Chart Room. Of course this target could also
be met in December, so if you have short positions on here and the prices continue
to squeeze higher don't fret, as relief should arrive sooner or later as another
stab at support denoted in the picture below is experienced. (See Figure 11)

Figure 11

On to a few comments and pictures focusing on precious metals now in order
to wrap things up in total for this review. As mentioned above, if monetary
debasement rates accelerate here any weakness in equities experienced in coming
days should dissipate quite quickly, leading to potentially significantly higher
prices for precious metals if a hyperinflationary scenario develops, as suggested
by a potential breakout in Figure 6 above. Here, as you can see in this chart,
if we are to relive the experience seen in the early 80's (the last top), MZM
annualized growth rates should top 40-percent in the end, which would be something
considering the numbers we are talking about today, not too mention the lobotomy
some bond traders will need afterwards. And of course it's in this respect
gold is a winning proposition these days, because we know from previous study
in just catching up to prior inflation it should be trading in excess of $2000,
not to mention the targets
that are possible in consideration of future inflation. (See Figure 12)

Figure 12

Unfortunately we cannot carry on past this point, as the remainder of this
analysis is reserved for our subscribers. However, if the above is an indication
of the type of analysis you are looking for, we invite you to visit our newly
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On top of this, and in relation to identifying value based opportunities in
the energy, base metals, and precious metals sectors, all of which should benefit
handsomely as increasing numbers of investors recognize their present investments
are not keeping pace with actual inflation, we are currently covering 71 stocks
(and growing) within our portfolios.
And more recently we have been focusing on the Red Lake gold camp, hosting
some very interesting emerging opportunities. In this regard I have just returned
from a due diligence trip and will be providing a report to subscribers later
this week. This is another good reason to drop by and check us out.

And if you have any questions, comments, or criticisms regarding the above,
please feel free to drop
us a line. We very much enjoy hearing from you on these matters.

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